Recent attention has been focused on whether Australian iron ore exports would be subject to Chinese economic coercion as relations deteriorate. But if the United States and China are heading into a new Cold War, Australia may face equally significant pressure from the United States to wind back these exports for security reasons.
Australia-China Trade Tensions
The recent downturn in Australia-China relations has prompted questions about whether Australian iron ore exports would be the next target for Chinese economic coercion. There are valid reasons to be concerned about this – earlier in the year the Chinese government imposed steep new tariffs on Australian barley and banned a number of Australian meat processing plants from exporting their meat products to the Chinese market, likely in response to Australia’s support for an investigation into the origins of the coronavirus.
While these interventions are likely to have a severe impact on barley and beef, they represent a much smaller slice of the Australian economy than iron ore exports to China. Earnings from iron ore exports in the 2019-2020 financial year were expected to exceed A$100 billion, according to a June update from the Department of Industry. Roughly 80 percent of these exports go to the Chinese market.
Despite tensions, however, recent data suggests China continues to show a great appetite for Australian minerals: up to 60 per cent of China’s iron ore imports in 2019-2020 came from Australia. This probably comes as a great relief to policymakers in Canberra trying to make sense of just how much pain Beijing would be willing to inflict on China’s economy to teach Australia a lesson. Because of the current lack of alternative markets for China to source iron ore, it is likely to be an area of Australia-China trade that is relatively immune to Chinese economic coercion.
Prime Minister Scott Morrison’s recent comment that Australian trade with China ‘has never been stronger’, suggests that the government believes the mutual benefits of the relationship will likely insulate it from a further escalation in trade restrictions.
The Risk of a New Cold War
But the focus on Chinese economic coercion overlooks perhaps the biggest trade threat Australia will face in coming years. If the US-China relationship deteriorates into a new Cold War, Australia will face increasing pressure from the United States to wind back some of its most lucrative exports to China.
How will Australia respond if the United States decides that all trade with China that might enhance its warfighting capabilities, including trade between Australia and China, must stop? This may sound like an alarmist question, but it shouldn’t. The possible role of Australian iron ore in China’s naval build-up has already been highlighted by some analysts and will likely face increasing scrutiny from the US in the years ahead.
Lessons From the Last Cold War
In the early years of the US-USSR Cold War, European allies were faced with a very similar dilemma. With the post-Second World War economic recovery in the balance, the US made economic aid conditional on allied agreement to an expansive range of export controls against the Soviet bloc. While many think of America as the champion of free trade, during the Cold War its initial preference was much closer to that of managed trade.
In the context of a Cold War, managed trade is about restricting an adversary’s access to the resources and materials needed for military production. Iron ore is typically viewed as one of these vital resources because of its role in steel production.
Some US security experts at the time even advocated for a full embargo of the Soviet Union, with the goal of blocking all trade with the Soviet Union entirely.
States in Western Europe in particular were strongly opposed to adopting a policy of ‘economic warfare’ against the Soviet Union due to their history of trade with Eastern Europe. But the threat of aid being withheld left US allies with little choice.
It was not until the mid-1950s that pressure from European allies, the UK and Japan led to a significant softening of allied export controls against the USSR. Ultimately, the US needed to maintain unity within NATO more than it needed to maintain the strict trade regime.
Contradictions in Australia’s Approach
The lesson for Australia here should not be missed: If the US concludes that war with China is likely inevitable then Australian iron ore exports will be firmly in its sights. Unlike the European allies, it’s not clear that Australia will have the same geopolitical leverage to resist US pressure to decouple.
While Australia is not dependent on economic aid from the US, there are a range of levers that could be pulled to hurt Australian exports to China. Unilateral US sanctions against targeted Chinese entities would be one way of creating a legal minefield for companies exporting Australian iron ore to China.
In a protracted Cold War scenario, the US could even link the issue of Australia-China trade to the reliability of its ANZUS alliance commitments. The point here is that if Australia wishes to separate its economic interests from security issues, a new Cold War will make that extraordinarily difficult.
What the future holds is impossible to know, but the current trajectory of the Trump administration suggests that if President Trump is re-elected for a second term, the United States will continue to pursue its own decoupling from China and expect close allies to follow.
The economic cost for Australia to follow the US down this path would be astronomical. For all the talk of trade diversification, China is still Australia’s largest trading partner by a large margin.